Societies, taxpayers and political systems vary throughout Latin America. The adviser needs to be aware of these differences and needs to know the family, the assets, the business, the citizenship, residence and domicile, the investment objectives and diversification and the tax and non-tax objectives. It may require his adviser to compile a detailed questionnaire, and devote time and patience to obtain such information from the client. He will need to consider the countrys tax system worldwide or territorial, possible application of controlled foreign company rules, blacklists, tax treaties and TIEAs. It is difficult to explain the trust concept (except perhaps, to the client from Belize or Guyana). Non-tax considerations include businesses and economics, social and personal issues, personal and financial security. One often needs to work with foreign counsel in order to coordinate complete estate planning. There are particular tax considerations when the Latin American family has a US member or a member intending to acquire US fiscal resident status e.g. there are accounting issues (different year ends and other differences), reporting requirements, civil and criminal penalties. Non-compliant individuals can be subject to audit by the IRS in many ways: it is always better to come clean and become compliant, possibly by amending tax declarations and/or correcting a non-filing situation, than be found out without having done so.
Where a non-US settlor creates a Cayman trust which owns a PFIC and has even one US beneficiary, there can be a tax charge on a share of the PFIC income. It may be better to create two settlements one for the US beneficiaries, one for the non-US beneficiaries. The court might facilitate a division. There is also the possibility of distributing to non-US family members, who make gifts to US members. A non-US individual will routinely interpose an offshore company to hold US assets free of estate tax. US real estate may be held by a US corporation in turn held by an offshore company. The two-tier partnership is believed by the IRS not to work, but it is yet to be challenged. Asset protection is a legitimate reason for creating an offshore trust. Conferring a benefit on non-US family members is also a legitimate purpose. Foreign trusts, companies, foundations and bank accounts can give rise to FBAR reporting. There is pressure on institutions to become QIs; if this intensifies, it may trigger capital flight. The proposal to postpone deduction until the income is repatriated is being revived. Other anti tax-haven measures are being proposed, but expatriation has become more straight-forward.
An offshore transaction should not only be lawfully effected but should avoid drawing attention to itself. It may be wise to use a vehicle in some other territory one with a territorial regime, one of several Middle Eastern countries, a non-resident company, a limited partnership or other transparent vehicle. For treaty shopping, there is the Dutch Sandwich, the Malaysian Sandwich and treaty countries with the remittance basis or other favourable regimes Cyprus, Malta, Seychelles, Mauritius. Substance is nowadays important: a vehicle should have a purpose and function other than tax avoidance. One way in which this may be provided is by the use of an additional trustee, a sub-trust or insurance policy.
Hedge funds are investment vehicles with a particular investment strategy and available to a large number of investors who typically come and go. A private equity vehicle generally has few investors, who remain invested for, perhaps, a ten or fifteen year period. A hedge fund will pay to the managers a management fee and also an incentive fee. A private equity fund will also pay a management fee plus the carried interest or carry. It is estimated that the hedge fund industry had, at its height, invested funds in excess of US$2 billion and the private equity industry an invested US$686 million. Cayman is the major jurisdiction for hedge fund registration, but some offshore funds are established in Luxembourg, Ireland and Malta. Thw fund may take the form of a limited partnership, company or unit trust. A company has a requirement for maintenance of capital; a partnership or trust does not, generally speaking. The Japanese generally like to use a trust. Europeans prefer the company; US promoters prefer the limited partnership. There can be restrictions on redemption of investments in the hedge fund gates, deferrals, suspension of calculation of net asset value, redemptions or withdrawals. An illiquid asset may be side-pocketed or warehoused in an SPV. Capital calls on investors may be made. The Strategic Turnaround and Matador case have considered questions arising on redemption. New funds are still being launched, though the volume is down. Feeder funds provide for the tax regimes of different investors and invest in a master fund. The Stop Tax Haven Abuse Bill and a Foreign Account Tax Compliance Bill in the US and the EU Alternative Investment Funds Directive may have effects on the industry in the future.
The IRS has ways to obtain information from their opposite numbers in other countries under tax treaties and TIEAs. The TIEA was suggested by Richard Gordon some 30 years ago to replace tax treaties with the BVI, Netherlands Antilles and elsewhere. Barbados, Jamaica and Trinidad got a treaty as well. The TIEA has recently become very widely used. The OECD claims to apply an internationally agreed tax standard in information gathering this covers information not needed for local tax purposes and extends to information held by banks and other financial institutions, overriding domestic legislation like the Confidential Relationships Act in Cayman. There have been over 100 TIEAs since last April, many with Caribbean countries. Aruba, Barbados, Bermuda, BVI, Cayman, and Netherlands Antilles now have the requisite 12 agreements to be white-listed. Jurisdictions that have not yet signed the full 12 are Anguilla (4), Antigua (10), Bahamas (8), Dominica and Grenada (1 each), St. Kitts-Nevis (6) and St. Vincent and Turks and Caicos (5 each). Belize and Montserrat have none. Identical TIEAs with the Nordic countries count for seven. St. Lucia has a TIEA with the US, but the implementation legislation has not been enacted. The OECD and the Council of Europe have announced that the European Treaty can be extended to Caribbean and other countries. The US has MLATs with a number of countries in the Caribbean and several countries in the Caribbean are parties to the Organisation of American States basic MLAT e.g. Antigua, Bahamas, Dominica, Grenada, Guyana, Jamaica, Suriname and Trinidad, though none has signed the optional protocol covering assistance for tax crimes. The Hague Evidence Convention can require parties to provide tax and other information in civil or commercial matters: France extends its provisions to overseas departments and dependent territories, the Netherlands to Aruba (but not the Netherlands Antilles), the United Kingdom to Anguilla and Cayman and the United States to Puerto Rico and USVI. The US also has extradition treaties. The more recent ones apply to any crime punishable by a year in jail a very wide category. Sometimes the power to extradite is confined to nationals. In the US, TIEAs do not require ratification. Cayman signed a tax treaty with the UK in June of this year. The next step by the OECD will be to test whether the TIEAs are truly applied. Cayman supplies information to all EU countries under the European Savings Directive. The Cayman MLAT with the US excludes tax offences (unless money involved comes from drugs).
Offshore centres face a difficult journey into the future. They have suffered economic decline, but it seems likely that the world will still need the OFCs. Cayman has a new constitution. The United Kingdom retains considerable powers, but the local government has greater powers than formerly it has recently issued bonds, which required UK approval. The OECD and other initiatives are designed to keep control of the worlds capital in the major jurisdictions. A financial transaction tax could be beneficial to the OFCs. The OECD is presently focussing on transparency. The OFCs scrambled to sign the necessary twelve TIEAs including Cayman, which is now on the White List. A plethora of international rules, lists, regulations and other initiatives is a feature of our times. The EU Savings Directive I was, as expected, a failure. But it was a step towards greater exchange of information. The QI programme is being strengthened. Cayman cannot ignore these developments, but has been slow to acknowledge the threat posed by the changes in the world outside. TIEAs are being entered into, international involvement has grown, Government has carried out PR exercises and is encouraging the establishment of new businesses.
The Private Trust Company (PTC) has a fast track procedure for registration under the Private Trust Regulations of 2008. It conducts connected trust business. It does not require a licence. A Restricted Trust Licence Company (RTLC) has a licence to provide services to a limited class. It must have an office in Cayman or use an existing trust company to represent it. A PTC will cost less than an RTLC but may not be cheaper than using a regular trust company. A PTC can be used to relieve individuals from the responsibility of acting as trustee. It may be owned by the settlor or persons close to him, retaining control over e.g. the family company. It is useful for holding higher risk assets. It can be used to involve the next generation in the management of the family assets. It avoids problems which can be involved in changes of professional trust companies. It can function as a stepping-stone to the use of a professional trust company. There are pitfalls. The settlor and other family members may not have the skills to act as directors of a PTC. Beneficiaries may have a dog-leg claim against the directors. A director may be liable for accessory liability, or in tort, or in insolvency proceedings. Such claims are not likely, but an intending director should be aware of their possibility. The PTC may be controlled by the settlor, by a purpose trust or under other orphan arrangements. Its constitution should try to foresee and avoid family quarrels and provide for good governance and administration.
The STAR Trust regime was introduced in 1997. The trustee owns the equitable as well as the legal interest in the trust property, but subject to obligations to benefit purposes or persons. It is a specific statutory regime, but the rules on ordinary trusts are preserved. A STAR Trust can be perpetual. The purposes can be public or private. There must be an Enforcer. The purposes must be lawful and they must not be contrary to public policy so that real property in Cayman cannot be included. A non-beneficiary Enforcer must be a mandatory enforcer. A beneficiary Enforcer may enforce. Amendment can be made on cy-près principles. The rule in Saunders v. Vautier does not apply. Benefit, control and enforcement can be separate. Beneficiaries who cannot enforce are not entitled to information. Purposes can extend to non-charitable philanthropy. The Trust can be useful for political risk management. The STAR Trust has been little used in commercial transactions : it may not appeal to the onshore commercial lawyer. Trustees have problems holding difficult assets. Clauses in the trust instrument may limit their responsibility. Another approach is to use a limited partnership, or an exempt company with voting and non-voting shares. The Private Trust Company offers another solution. The Reserved Powers Law permits the settlor to reserve powers to himself; this is particularly attractive to settlors subject to a forced heirship regime. The STAR Trust offers trustees protection; management of the assets may be delegated to the settlor during his lifetime and then conducted by a family council.